As an example of how government investment and policy can make a dramatic impact on the performance of the technology sector of a developing country, Israel is a fascinating case study.
Despite its small size and troubled geopolitical situation, its population of 6.5 million generates a gross domestic product (GDP) of $110.6 million, which translates to a per capita figure almost three times that of SA. Information and communications technology accounts for a staggering 20% of this number.
Economic growth is down, however, from its dizzy peak of 6.4% in 2000, as the global slowdown and increasing tensions in the occupied Palestinian territories put increased pressure on its export-led economy.
Yair Ofek, director of the Israel Export Institute, plays down the impact of the second Intifada, the Israeli action in the West Bank and Gaza, and the frequent suicide bomb attacks on the part of Palestinian groups.
Instead, he points out that Israel is the only politically stable democracy in the region, but lacks natural resources to drive its economy.
"We only have milk and honey, but we need oil and iron ore," he quips.
This scarcity has led Israel to turn to its human capital. It boasts twice the number of engineers per 10 000 employees than the US, and as a result depends heavily on high technology for its exports and GDP. While 1992 saw the country earn $150 million each from the export of Jaffa oranges and software, in 2001 the former had declined to $100 million, while the latter rose to a staggering $3.5 billion.
Export of Israeli high technology slumped dramatically in 2001 after steady growth for a decade that peaked at $15 billion in 2000. Recent month-on-month numbers reported by the local Ha`aretz news daily indicate that the slide is continuing.
Despite pressure to cut budgets, the Ministry of Industry and Trade perceives research and development (R&D) as the engine for future growth, and has convinced the Israeli government to continue its spending, especially in the ICT sector.
It spends 3.6% of GDP on civilian R&D, topping every other Organisation for Economic Cooperation and Development country. This represents almost a quarter of the total GDP generated by the ICT sector.
Such government support, combined with high levels of foreign direct investment, an entrepreneurial spirit fostered in part by the military, and risk-sharing seed capital programmes led by the government`s office of the chief scientist, have made Israel a high-technology powerhouse boasting between 2 000 and 2 500 active technology start-ups - the highest concentration outside the US.
The chief scientist in the Department of Industry and Trade is responsible for a budget of $500 million a year, to provide seed capital for promising start-ups which have succeeded in raising 15% of their own capital. The outside investor requirement relieves the government of having to fully understand each technology firm, and allows it to evaluate the business plan instead. Funding is provided for two years, by which time the start-up is expected to attract outside capital to fund its operations, or raise sufficient revenue to survive on its own.
Officials couldn`t say how many of the start-ups that emerge from Israel`s technology incubators are profitable, although one estimate noted a 10% success rate. One incubator reports that 51% of the 735 projects it has funded are still "viable companies".
The stated goal is to fund start-ups in the initial phases so that once they emerge as a two-year-old operation with customers and revenue, they look much more attractive to private capital. The government-funded programme also avoids the fashion-consciousness of private investment, and will fund promising technology in areas that are out of favour with private equity.
Many are involved in developing innovative technology, and Israel has the highest number of technology companies listed on US markets after Canada and the US itself.
Capital raised by Israeli venture capital and other firms, though down from the highs of 2000, is still above 1999 levels, according to figures from the Ministry of Industry and Trade. Of this, 42% is directed at telecommunications technology firms, and 20% in software companies.
In an effort to revitalise the export potential of its high-tech industries, the country is widely promoting the Telecom Israel 2002 Conference and Exhibition, to be held in Tel Aviv in November. Last held two years ago, the organisers expect to attract 3 000 international visitors among the 150 000 attendees, down from 4 500 last time. On show will be 400 Israeli companies and their products, among which are 100 selected technology start-ups.
At the launch of the event, Uri Olenik, the director-general in the Department of Communications, said the aim of the conference was to promote the Israeli telecoms sector as an investment destination, showcase its technology to attract customers and offer opportunities for Israeli companies to develop partnerships with local and international firms. Using words familiar to South Africans, Olenik stressed the hope that the exhibition would offer a different impression of the country than that gleaned from typical newspaper and TV headlines.
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